Question
Cane Company manufactures two products called Alpha and Beta that sell for $165 and $130, respectively. Each product uses only one type of raw material
Cane Company manufactures two products called Alpha and Beta that sell for $165 and $130, respectively. Each product uses only one type of raw material that costs $8 per pound. The company has the capacity to annually produce 113,000 units of each product. Its unit costs for each product at this level of activity are given below:
Alpha | Beta | |||||||
Direct materials | $ | 40 | $ | 24 | ||||
Direct labor | 29 | 25 | ||||||
Variable manufacturing overhead | 15 | 14 | ||||||
Traceable fixed manufacturing overhead | 25 | 27 | ||||||
Variable selling expenses | 21 | 17 | ||||||
Common fixed expenses | 24 | 19 | ||||||
Total cost per unit | $ | 154 | $ | 126 | ||||
The company considers its traceable fixed manufacturing overhead to be avoidable, whereas its common fixed expenses are deemed unavoidable and have been allocated to products based on sales dollars. |
Assume that Cane expects to produce and sell 104,000 Alphas during the current year. One of Cane's sales representatives has found a new customer that is willing to buy 19,000 additional Alphas for a price of $116 per unit. If Cane accepts the customers offer, it will decrease Alpha sales to regular customers by 10,000 units.
a. | Calculate the incremental net operating income if the order is accepted? (Loss amount should be indicated with a minus sign.) |
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